Business planning essential in a free-market dairy industry

As
the consumer watchdog prepares to investigate the dairy sector, a Charles Sturt
University (CSU) academic has highlighted the need for good business management
skills in the industry.

Head
of CSU's School of Agricultural
and Wine Sciences
in Wagga Wagga, Professor David Falepau, has welcomed the move by the Australian
Competition and Consumer Commission to
undertake a new, broader inquiry into the industry from November.

In
the meantime, Professor Falepau, who specialises in agricultural business
management and agri-food and fibre value chains, says good business management
skills will be absolutely crucial for dairy farmers dealing with the fall-out
from cuts to the farm-gate milk price.

He's
identified two key questions for dairy farmers and processors to consider as
they work their way out of the current situation.

"The
first is for dairy farmers, do they fully understand the difference between
production risk and market risk and know how their business may be exposed to either
or both of these?

"It
appears that many dairy farmers, by the nature of their supply contracts with
processors had exposed themselves to the full extent of both the production and
market volatility, without a clear understanding of the upside and downside
consequences to their financial position that exposure might present,"
Professor Falepau said.

"The
second question is probably as much for the processors to consider as the
farmers. Were the risks inherent in the various supply contracts being used
between farmers and processors fully and sufficiently disclosed?

"Perhaps
also along these lines, were the processing companies' market demand and price forecasts
responsible and associated volatilities sufficiently disclosed to their
contracted suppliers?"

In
regard to the claw-back of money paid by processors to farmers Professor
Falepau said, "Having a system by which primary producers have the opportunity
to be rewarded commensurate with the market is okay. One assumes that if the
market had paid more than the processors had predicted, that would have been passed
back to the farmers too.

"It
appears that the Murray Goulburn and Fonterra procurement systems are based on this
assumption," he said.

"I
do believe further investigation is warranted into whether Murray Goulburn or
Fonterra acted responsibly and disclosed fully the risk exposure to their dairy
farmer suppliers."

Professor
Falepau said the issues now facing dairy farmers are a very clear reminder that
the sector is based on free market principles; that is without market
regulation.

"My
personal observation is that many dairy farmers traditionally focus their
thinking very much on production and less on their business structure including
marketing," Professor Falepau said.

"This
is understandable as many dairy farms are still small to medium businesses, family
owned and operated.

"One
or two people are doing everything; acting as chief executive officer, chief financial
officer, HR manager, general manager, marketing and sales, chief operating
officer and everything else in between.

"The
downside of this is that many dairy farmers perhaps weren't aware of alternative
channels to market, or the risks they were exposing themselves to with the
contracts put forward by Murray Goulburn and Fonterra.

"I
have talked to some exceptions to that who did understand the risks associated
with the Murray Goulburn and Fonterra supply arrangements and chose not to take
them on. For example; one farmer took the position to supply three different dairy
processors, each with a quite different supply contract.

"They
did struggle a little when many of their dairy farmer colleagues were getting
paid higher milk prices. But now they
are in a position to grow their businesses if opportunities from the current
situation present themselves."